PCI DSS Compliance Blog

The Durbin Amendment: Who’s Pocketing the Savings-- Your Customer or the Processor?

By Sean Kramer, President and CEO, Element Payment Services

The Federal Reserve made final rulings on the controversial Durbin Amendment back in June of 2011 that capped processing fees on debit and credit card transactions. As a result, merchants have received the biggest reduction in credit card processing charges in the history of the electronic payment industry. What many ISVs don’t realize is that their processing providers’ rate structure determines who pockets the savings: your customer (the merchant) or the processor themselves.

What is Durbin?

Under the new federal regulation stemming from the Durbin Amendment, starting on October 1, 2011, banks that issue credit cards are prohibited from charging or receiving an electronic debit (both signature and PIN Debit) interchange fee greater than the sum of : (i) 22 cents (21 cents without fraud adjustment) (ii) 5 basis points (.0005%) times the amount of the transaction.*

Impact for Merchants

For merchants on pass-through pricing models, in which the interchange rate for each transaction is passed through plus a separate mark-up, the Durbin Amendment promises significant savings. In fact, merchants could see their credit card processing charges cut in half since debit cards comprise nearly 50 to 70 percent off all card transactions. However, many merchants will never see these savings as processors have used Durbin as an opportunity to give themselves a raise. Because many processors force customers into Tiered Pricing structures that lack transparency and allow them to hide profits, merchants for whom Durbin Savings was intended, will never see these funds.

The Bottom Line

It’s important for ISVs to understand their integrated payment provider’s merchant rate structure and how it will affect Durbin savings for customers. As an organization, Element has offered True Pricing™ (interchange plus pricing) to our ISV customers since inception, resulting in cost savings across the portfolio. We recently analyzed a multi-location spa merchant to evaluate actual cost savings from the Durbin Amendment. The results were a significant drop in effective rate (2.11% to 1.77%) resulting in $180,000 of cost savings in a single month. Annualized, the savings would equate to $2 million. “We’re pleased that our customers are benefiting from Durbin as intended. I’d encourage other ISVs to clearly understand a processors rate structure when evaluating potential partnership. It’s only fair to the customer,” says John Harms, CEO, Harms Software.

*The Durbin Amendment’s interchange fee restrictions do not apply to any issuer with assets of less than $10 billion, taking into account its worldwide affiliates. Certain other debit cards are exempt from Durbin. They include reloadable prepaid cards, and government administered payment programs (subject to certain exceptions that become applicable in one year). The other components of the law regarding network routing and exclusivity have a technical impact on transaction routing.

Element Payment Service – Simply TransForming Payment Processing

From secure, reliable and cost-effective payment processing to state-of-the-art solutions to help you grow your business, Element has the innovation, technical expertise and vision to help you remove risk and compliance related expense from your business. Look to us for solutions that simply transform payment processing, while delivering the highest return on your investment.

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New Resource Available for Merchants on Mobile Payment Acceptance Security

Today the Council published an easy-to-use reference to help merchants understand how they can leverage PCI Standards to securely accept payments using mobile devices such as smartphones or tablets. Please read the press release here.

Specifically, the At a Glance: Mobile Payment Acceptance Security fact sheet provides merchants with actionable recommendations on partnering with a Point-to-Point Encryption (P2PE) solution provider to securely accept payments and meet their PCI DSS compliance obligations.

As with all SSC fact sheets, this guidance does not replace or supersede any of the PCI Standards. The Council continues to work with the payments community to address mobile payment acceptance security and evaluate whether additional requirements are needed in this area. As part of this ongoing initiative, the Council plans to publish best practices for securing mobile transactions later this year.

Sincerely,

Bob Russo

PCI Security Standards Council General Manager

Durbin Amendment Updates – How has the Industry Responded?

The Federal Reserve made final rulings on the controversial Durbin Amendment back in June of 2011 that capped processing fees on debit and credit card transactions. The impacts of the amendment are now being seen and felt throughout the banks, merchants and even down to the consumers.

The Durbin Amendment fought to protect merchants and consumers; however, the amendment is actually protecting the banks, resulting in increased costs for merchants and consumers. 

The intention of the reform was to regulate processing fees paid by merchants, but for some merchants, they have actually seen increases in their debit card transaction fees. Most notably was Redbox, a DVD rental vendor that only completes transactions through debit and credit, who had to increase their rentals 20%, from $1.00 to $1.20, in order to compensate for the added fees. Chief Executive Paul Davis was quoted saying that their price increase stems from operational costs, mainly debit-card interchange fees.

Concurrently, the banks now claim a decrease of collected money through processing fees, which has resulted in these banks ending debit card rewards programs and including fees on checking accounts, which ultimately costs the consumer more to partner with their bank.

The domino effect of the Durbin Amendment continues to roll along and unfortunately, the amendment continues to stir up questions and concern as consumers and banks go head-to-head. In November of 2011 consumers fought banks against the proposed monthly debit card fees and ultimately won; banks decided to not instate monthly fees for the use of debit cards.  

Consumers, merchants and banks will continue to encounter the waves from the Durbin Amendment tsunami, working toward a reasonable solution. Only time will tell.

 

Future implications of the Durbin Amendment

April 1st, 2012 – Two-network minimum requirement for issuers goes into effect.

April 1st, 2013 – Two-network minimum requirement for prepaid debit and benefit cards goes into effect.

The requirement for issuers to partner with two networks creates a two-tier pricing system that some networks may have difficulty navigating. A network can no longer only partner with Visa, who has agreed to honor the cap exemptions. They must choose a second vendor, and there is no guarantee of protection.

The Durbin Amendment has created questions and concerns throughout the industry, with business owners wondering the impact the Amendment has on their business. Payment processing technology is key to businesses keeping up with the ever-changing industry. Let the experts at Element Payment Services make sure you are ahead of the curve, and help you better understand the Durbin Amendment and its potential impact, by contacting us today.

 

Infographic Provided By: http://www.nerdwallet.com/infographics/durbin-timeline